How are Pensions Taxed?

Shawn Plummer

CEO, The Annuity Expert

Pensions Taxation

Pensions are typically taxed as ordinary income. This means they are subject to the same tax rates as your regular income, like wages or salaries. Your pay depends on your total income and your tax bracket.

Taxation of Nonqualified Annuities

Nonqualified annuity options are taxed using the exclusion ratio method. This method determines what portion of your annuity payment is taxable. It considers the amount you contributed to the annuity (your investment in the contract) and the total expected return. The portion of each payment that is a return on your original investment is not taxed, while the portion considered earnings is taxed as ordinary income.

Pension Taxation

Example of Pension Taxation

  1. Regular Pension: If you receive a monthly pension of $2,000 and fall into a 22% tax bracket, your tax could be 22% of $2,000, which is $440 monthly.
  2. Nonqualified Annuity: Suppose you invested $50,000 in an annuity and expect to receive $100,000 over its lifetime. Half of each payment is your original investment (not taxed), and the other half is earnings (taxed).

Taxation of Pensions and Annuities

Type of Retirement IncomeTaxation MethodExampleTax Rate Applied
Regular PensionOrdinary Income Tax$2,000 monthly pensionDepends on tax bracket
Nonqualified AnnuityExclusion Ratio Method$50,000 investment, $100,000 returnPartially taxed

Conclusion

Understanding how pensions are taxed is crucial for financial planning. Regular pensions are taxed as ordinary income, while nonqualified annuities use the exclusion ratio method. Knowing your tax bracket and the nature of your retirement income can help estimate your tax liabilities. Contact us today for a free quote.

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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